Last month we ended our report on Freddie Mac's April Economic Outlook with the statement that "Freddie Mac's April Economic Outlook deviates only slightly from predictions in earlier months; the housing market is slowing but certainly not screeching to a halt."

May's report which was issued this week paints a slightly less optimistic picture.

The Office of the Chief Economist has revised many of its expectations for economic and particularly real estate benchmarks for the year, all of them in what most people would consider a negative direction, compared to the April report. For example, the report has, for some months predicted that fixed rates mortgages would end the year at around 6.5 percent. The May report revises that estimate upward to 6.7 percent. Likewise, the introductory rate on the 1-year ARM which was expected to average 5.5 percent during the fourth quarter is now projected to be at 5.8%.

The report states the obvious, that an increase in mortgage rates will dampen housing activity and housing starts and home sales are forecast to drop about 7 percent this year relative to last year's record levels. In April, on the heels of unexpectedly strong housing start figures for the first quarter, Freddie revised its estimates strongly upward from the previous month, estimating that starts for the year would total 1.99 million, only 4 percent lower in 2006 than in 2005. This month the figures have been reversed to reflect a drop of 7 percent this year; from 2.07 million starts in 2005 to a total year-end figure of 1.93 million this year. Freddie is holding firm on its home sales figures, however, still anticipating 6.8 million home sales (annualized) by the fourth quarter and raising its year long estimate from April's 6.93 million to 6.97.

The report significantly downgraded expectations for home price appreciation this year. The current estimate is now a 7.5 percent increase for all of 2006 compared with 8.7 percent projected in the April report.

Refinancing activity is expected to take a bigger hit than had been earlier anticipated. Refinancing represented 44 percent of mortgage activity in the first quarter of this year and was projected to slow to 36 percent by year end in the April report. Now Freddie anticipates it will only represent 30 percent by the end of the year. Adjustable rate mortgages will also lose market share at a higher rate than expected. ARMs represented 28 percent of the market during the first quarter of this year and that was expected to decline to 27 percent by year end. With the increasingly flat yield curve Freddie is now projecting a 23 percent ARM share by year end.

In our current volatile situation vis-à-vis the war, the deficit, gas prices, etc. we are currently feeling that it is hard to take long term projections too seriously but Freddie now sees an annual rate for the 30-year fixed during 2007 at 6.8 percent as compared to the 6.6 percent it was projecting one month ago. Housing start estimates have been revised downward by .08 million since last month and sales estimates have dropped from 6.65 million to 6.50 million.